SPOT v2 — The Path to Counter Cyclical Demand
A reflection, not financial advice.
“There was once a dream that was Rome. You could only whisper it. Anything more than a whisper and it would vanish… it was so fragile.” — Marcus Aurelius, Gladiator
In 2017, when we first started dreaming about decentralized stables, there was an idea I found particularly interesting. That is the notion that a widely adopted stable asset, collateralized entirely by one or more decentralized cryptocurrencies, could significantly change the market behavior of the entire asset class.
Today, the market still follows precisely two animal spirits, bear and bull, fear and greed. People buy cryptocurrencies in times of greed, and sell into safe-assets in times of fear. Yet although there’s enough variation between cryptocurrencies to manage a portfolio’s risk while markets are bullish, correlations tend towards 1 when markets are bearish. So investors remove their assets during bear markets altogether — and these cycles are painfully long-lived.
But what if a widely-adopted, durable, safe-asset, was collateralized by one or more cryptocurrencies?
Well, assuming demand for this safe-asset propagates into demand for its underlying collateral, one or more cryptocurrencies would simply grow in times of fear, decoupling from the rest. At scale, this sort of counter cyclical demand could give reason for portfolio managers to maintain continuous exposure to the asset class — because there would always be something growing.
We tabled this whispered thought long ago. As it turns out, creating a durable decentralized safe-asset is not a trivial endeavor. And we simply needed to focus on its design and development first.
Now, with the release of SPOT’s v2 rotation vault, I find myself revisiting the subject of “counter cyclical demand” quite often. It is finally relevant to the SPOT / AMPL ecosystem and I’ll explain why here.
SPOT → AMPL Without the Supply Volatility
AMPL, launched in 2019, has mean-reverting price around its target, the CPI-adjusted 2019 dollar. And it has been demonstrated rather clearly now that the price of AMPL always returns to target, even through extreme market conditions.
With a price distribution like the one pictured above, you would think it both simple and profitable to apply the counter cyclical strategy of purchasing AMPL under its price target and selling over its price target.
But it’s not that straightforward, because although it’s clear that price will eventually revert to the 2019 dollar target, holders cannot precisely know how long this process of finding an equilibrium will take. And in the meantime, they are exposed to volatility through supply rebasing.
The upcoming SPOT rotation vault upgrade changes things.
V2 — Closing the Arbitrage Loop
SPOT, a low volatility derivative of AMPL, is undergoing an upgrade to its rotation vault that will allow users to directly swap between AMPL and SPOT.
The upgrade will make it trivial for market actors to arbitrage between the two assets. When prices deviate between the two assets a third party can simply buy one, swap it for the other, and sell to keep the difference.
This sort of simple arbitrage will have the effect of making SPOT trade like AMPL except without the supply volatility. Meaning it will share AMPL’s mean-reverting price distribution, but won’t rebase. Thus, it will be straightforward for market actors to:
- Buy SPOT under the AMPL price target
- Sell SPOT over the AMPL price target
Doing so captures value without requiring speculation around the timeline to find equilibria—in all but the most extreme circumstances—because unlike AMPL, SPOT is not exposed to automatic supply changes.
And lastly, once the v2 upgrade completes, counter cyclical demand driven by SPOT will propagate into counter cyclical demand for AMPL.
Plainly stated, the swapping mechanic allows rational acting counter cyclical demand to enter the AMPL ecosystem.
Of course, the knowledge that someone out there will be buying and selling SPOT counter cyclically — combined with the understanding that doing so puts corresponding pressure on AMPL — should further cause AMPL to find equilibria faster, narrowing its price distribution.
Glimpsing this sort of micro-scale counter cyclical demand mechanic, like seeing the first of a new species swimming in a petri dish, begs the question: Might there be some kind of medium-scale counter cyclical dynamic around the bend?
AMPL to SPOT — A Counter Cyclical Mantra
Returning to the broader context above, I can’t help but wonder: What happens if the folks who are long AMPL, collectively choose to retreat into SPOT or some SPOT / USDC pool, whenever they feel the asset is overheated?
My sense is the very act of retreating from AMPL’s supply volatility in this way, would meaningfully counter negative supply changes, creating fast floors after run ups.
This sort of medium-scale counter cyclical behavior would be the beginning of something powerful and new.
Surely, if such a behavior were happening at the scale of USDT—and folks were rotating into SPOT-like assets when seeking refuge—the market dynamics of the entire cryptocurrency asset class would change.
Food for thought,
